VGENX vs. VFINX

[rj.phila]

hey all, so as a guy who has shunned index funds in the past, im considering dipping my toes in (diversification and all that jazz). i just did a cursory glance over some vanguard funds(see link below), but i've got a question: the energy fund seems like a no-brainer to me. its performance, both since inception, and at every tier, beats the 500 index fund to hell. what am i missing here? i cant see a plausible explanation how energy is going to get any cheaper in the future, and MANY explanations as to why it will actually skyrocket. is this the closest thing to an slam dunk fund there is, or am i missing something here? mind you, this is not a field i have followed, so i might be missing something very elementary here, but even if the expense ratio #'s are calculated post-return, the energy fund is still whoopin up on the 500 index fund hard.

is it as it looks, or im overlooking something? thanks.

[thomsoad]

Energy fund is a sector fund and not an index fund. Which means you are putting all your chips into one niche. Granted its not all in one stock but still pretty risky to put everything in.

What I believe you are missing:
1) Beating 500 index to hell means its either already fairly valued if not overvalued.
2) Risk. One bad report or forecast sends this Sector into hell.

Case in point ... What happens if OPEC disbands; US decides (or is rumored) to dissolve EPA; or Antartica loses more of its icecap?

Point is any one of these events will absolutely cream every single stock you are in. Im not saying stay away from energy stocks ... I just wouldnt bet the farm on such a small section of the world stage.

[Hector]

There is nothing wrong in choosing the certain market segment and allocate nominal percentage of portfolio to it.

From my understanding, no one is able to outperform market consistently. A lot of people like to play safe and prefer not to loose a lot over trying to make a lot. Or should I say, majority of us try to outperform market during the initial years of our investing and when we can’t outperform the overall market, we go for proper asset allocation.

For sure energy sector has done better and if you are firm believer that it will continue to do so, there is nothing wrong going all in. after all it is your money and you should do whatever makes you feel happy and comfortable.

Putting all eggs in one basket means high risk. Generally high risk means high returns. So if you have stomach for high risk, there is nothing wrong in taking higher risk by allocating a lot into a particular segment.

Generally winners from the past underperform in the future. But no one knows the time. Who knows energy sector will continue outperforming majority of the index for next 25 years. The only time we can find that out is in future and I don’t think anyone knows the future. Follow your rules and let no one tells you what is going to happen. If I know future, I won’t waste my time in telling it to you, I will invest all of my money in that segment and will make myself richer. Just make sure you take risk just enough that you can sleep well if something goes wrong.

[rj.phila]

awesome, thanks guys. (you guys are so friendly and helpful over here! its refreshing).

i would NEVER go anywhere near "all chips in" on any product that has inherent risk; that's just my comfort level. for me, a max would be something like 5-10% of my shiftable portfolio. im inherently very risk averse.

i guess one assumption i was making that may be VERY dangerous is that im assuming that an energy fund like VGENX attempts to track energy prices, not the energy CORPORATIONS value, per se. so while im pretty confident that energy(specifically oil) isnt going to get drastically cheaper as time progresses, im not at all informed enough to have any feeling about a company's balance sheet.

or, in a nutshell; VFINX looks pretty good to you guys?

[Hector]

To me,

VFINX is a good choice. I prefer VTSMX over VFINX.
Personally I like ETF more than funds and would choose VTI over VTSMX.

5-10% rule seems safe to me.

If you think that oil prices are going up only, how about buying OIL ?

[rj.phila]

Hector-thanks for that. i guess i didnt realize the advantages to an ETF over a fund(just googled). but i wonder why the returns on the life of the VGENX are so high, if the mechanics of it are less efficient than an ETF? doesnt make sense to me.

re:OIL. i actually looked into how to buy oil initially, but i only found 2 options: 1, buying stock in a company. and 2, buying oil futures, which have to be for a specific delivery date. this seems dicey. from all the studies ive read, im much more confident that we have reached peak oil production in the US(a long time ago), and that if it hasnt already been reached in SA and other ME countries, it will be in the next 5-10 years. so i have actually very little confidence(zero, actually) in my ability to predict a relative oil price in, say, 18 months, than i am that oil will be more expensive in 10 years than it will be now. i wouldnt be surprised at all if that date is moved up, but im not comfortable predicting WHEN.

is there an investment tool that best suits this outlook, over an energy fund?

[jpg7n16]

How much of your overall portfolio are we talking about investing here?

This seems like speculation based sector plays - so you shouldn't have the majority of your portfolio at stake. Seeing as how you'd be speculating on the unknown. If neighboring countries pull together with Libya and calm the storms of the oil supply in the area, all this hype over oil supply may go away and drive the oil prices back to reality.

I have no idea what will happen with the energy sector - nor do I know much about what drives prices there, so I can't be of help to you here.

Only help I can give is - if this is speculation, make sure it's a minority of your overall portfolio. Say 10-20% or less.

[jpg7n16]

re:OIL. i actually looked into how to buy oil initially, but i only found 2 options: 1, buying stock in a company. and 2, buying oil futures, which have to be for a specific delivery date. this seems dicey.

How to Invest in Oil - Invest in Oil with an Oil ETF

[Hector]

When I mentioned OIL - its a ticker symbol for ETF. I mentioned it because you are a firm believe that oil prices will go up and wanna bet small % of your portfolio on it. Buying OIL ETF might be the way to go.

[rj.phila]

How to Invest in Oil - Invest in Oil with an Oil ETF

thanks much for that. no, i'd be looking to do MAX about 5% of my portfolio eventually, only about 2.5% initially, and even only that if im really confident that im buying what represents what i want. the returns on the ETF OIL look terrible! wow.

re: Libya-trust me, there's no "armchair NYT speculation" thing going on here on my end. Libya's eventual shakeout-even the entire MIDDLE EAST shakeout- is actually less of a factor on my end than the mounting evidence(IMO, based on several books/articles/pieces ive seen over the last 5 years) of diminishing returns of oil generation on a global scale, as we move forward. but i digress....

[jpg7n16]

thanks much for that. no, i'd be looking to do MAX about 5% of my portfolio eventually, only about 2.5% initially, and even only that if im really confident that im buying what represents what i want.

Okay, sounds very good. You're limiting the risk - and I can't really fault you for backing what you believe and putting (some of ) your money where your mouth is.

the returns on the ETF OIL look terrible! wow.

That's very true. But I have no idea how to value Oil, so I don't know if it's undervalued, or just sucks

[rj.phila]

That's very true. But I have no idea how to value Oil, so I don't know if it's undervalued, or just sucks

no, agreed, sucks from my seat! wierd how its a sector that is arguably one of the most consistently profitable in the history of western civ, and as a citizen i cant just go buy a fund that consistently returns on that. cest la vie...